Cost worries loom over HMO shares
By Kim Dixon
CHICAGO, Sept 20 (Reuters) - Managed care stocks, a profitable refuge in the sinking stock market most of this year, have been weighed down in the past month as investors worry about how HMOs will grapple with soaring health costs and maintain fat profit margins.
The Morgan Stanley Health Care Payor Index <.HMO> of 12 health insurers has slumped about 8 percent since late August, even though nearly all the companies beat Wall Street predictions for profit last quarter and are expected to repeat the performance for the third quarter.
Health insurers like UnitedHealth Group Inc. <UNH.N>, the No. 1 U.S. insurer, and Aetna Inc. <AET.N> have rewarded investors with healthy returns over the past year as they pushed through premium increases of up to 20 percent.
Now, investors are bracing for a so-called pushback from those who are footing this bill -- employers and the government.
"Employers will make every effort they can to pay less revenue to the HMOs," said Sheryl Skolnick, a health care industry analyst at Fulcrum Global Partners.
That could come in the form of reduced benefit packages, and in an acceleration of companies moving to self-insure, where employers take on more of the risk and pay less to HMOs, analysts say.
No one argues about whether the pushback will occur; it is just a matter of when.
"Part of the reason for the poor performance of the managed care universe over the last several weeks is that investors have turned increasingly pessimistic that managed care companies will receive the pricing increases necessary to sustain the healthy earnings they have become accustomed to," Banc of America analyst Todd Richter wrote this week.
CYCLE
Driving all this is a runaway train that seems unlikely to stop any time soon: health care spending in the United States, is set to double from its current level to about $2.8 trillion by 2011 and account for 17 percent of the gross national product, according to government estimates.
In the mid-1990s, HMOs competed by trying to steal as many members away from rivals as possible. That kept premiums low, analysts said.
"People got very aggressive with premiums, to get as many members as possible," said Daryl Veach, national director of Ernst & Young's health actuarial services.
Insurers are now willing to give up members who don't make them enough money. Aetna Inc. <AET.N>, formerly the biggest HMO, for example, has shed thousands of members in recent years to bring itself back to profitability.
Premiums have stayed high during this period. But the tide will inevitably turn. Experts disagree about when. It's that uncertainty that is weighing on the sector, analysts said.
Behind UnitedHealth Group and Aetna, some of the biggest HMOs by membership include Cigna Corp. <CI.N>, WellPoint Health Networks Inc. <WLP.N> and Anthem Inc. <ATH.N>
Shares of Aetna are up 17 percent for the year, but down about 13 percent in the past month. The Morgan Stanley Health Payor index is up about 22 for the year, but down about 8 since Aug. 22.
NOT SUSTAINABLE?
Health insurance prices jumped 12.7 percent this year, the biggest hike since 1990, according to data released by the Kaiser Family Foundation this month.
"HMOs are coming away from the ability to raise prices," said Jeff Herman, a manager at the Exeter Life Sciences Fund. "They can't keep passing on these 10 to 15 percent increases."
"That's the fear -- when they start competing for members again and have to lower price," Skolnick said.
To stem this tide, employers have been skimming benefits and are moving toward making consumers pay more out of their pocket to fund their medical expenses.
UBS Warburg analyst Bill McKeever believes employers still have little choice -- in the short term -- but to go along with the steep premium prices they face.
Richter agrees HMOs still have the upper hand in negotiations with employers. But he agrees that can't last forever.
"Raising premiums at four to six times the overall inflation rate is not a long-term sustainable business strategy," he said.
09/20/02 18:15 ET |
